Startup Voice: startups

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Wednesday, August 10, 2016

Summary of Blog Post Topics on Startup Voice

To find a post of interest, use the search box at the top left-hand corner of the screen, review the list of "labels" on the right, or simply browse the posts listed below by topic.

I have tried to provide on my blog answers to most frequently asked questions relating to company formation and obtaining investment. If there are other general interest topics that you would like to see covered, please make a note of it in the comments section and maybe sometime soon you will see an answer posted on this blog!

General

Commonly Asked Startup Questions Answered (Expertorama Interview)
10 Basic Principles of Effective Networking
“Silicon Valley” Series – a corporate law perspective

Company Formation & Corporate Maintenance

Fundraising Process

Investment Terms

Investors' Perspective

“Silicon Valley” Series – a corporate law perspective

Over the past week or two, I binge-watched the first three seasons of HBO’s much talked-about series “Silicon Valley.” In truth, I only started watching because everyone was talking about it, and I felt that, given what I do, I needed to be able to participate in the conversation. But, I confess, I got sucked in, despite what, in my book, is an overabundance of profanity.

Given that counseling startups on corporate matters is my life, and one that I enjoy immensely, for that matter, I thought it would be interesting to analyze the legal basis to support Pied Piper’s predicament.

SPOILER ALERT! Don’t read any further if you don’t want to know what happens in the series through the end of the third season.

Board of Directors. The Board of Directors plays a key role in the fate of any company and we see the Board meet maybe four or five times throughout the series to make some pretty key decisions. But what is actually required for a Board to make a decision, legally-speaking? Here’s where the show took some liberties, for dramatic effect. There are only two ways that a Board can vote – by unanimous written consent, or at a meeting of the Board. The meeting must be attended by at least a majority of the directors, but all directors must be aware of the meeting. Meetings can be either regular (based on a pre-approved scheduled) or special. Each director must, typically, be given at least 48 hours’ prior notice of a special board meeting. Board meetings can be called on shorter notice, but only if each director waives notice.

If you’d like to get technical, notice requirements for special board meetings along with other corporate governance matters, can be found in the bylaws of a company. If you are a stockholder of a US corporation, the corporation is required to provide you with a copy of its bylaws on request.

How is it possible that Richard Hendricks did not know he was being fired as the CEO? In the show, Monica is the one to tell him. It’s a huge surprise and disappointment! But only the Board of Directors can fire or hire the CEO. They didn’t do it by written consent, because it has to be unanimous and Richard did not sign it. So they did it at a meeting, which he did not attend. That the CEO would miss a Board meeting is possible, though unlikely. However, It seems, he did not even know that a meeting of the Board was being held. Oops, that’s a problem from a corporate law perspective!

We see the same flop when Jack Barker, the outside CEO, gets fired in the next season. Richard and his co-founders come to the office to find his empty chair and Laurie Bream cleaning out his office. After Russ Hanneman sells his position to Raviga, Raviga acquires control of Pied Piper’s Board (three votes to Richard and Erlich’s two), so at a meeting they could certainly outvote the other members. But how ever did they meet in secret, without Richard knowing? But, let’s admit, the version in Silicon Valley is more fun! Laurie unexpectedly retaliating against Jack for his arrogance – a total Hollywood trope, no?

Convertible Loan. When Hanneman first offers a term sheet, the Pied Piper team is very excited. It saves them from having to sell to Hooli, and Jared (the only one to read it) thinks the term sheet isn’t bad. “It’s even structured as a loan,” they say, or something along those lines, making it sound like that’s the next best thing since sliced bread. Since we are talking startups, I can only assume they meant that he offered them a convertible promissory note.

For a $5M investment, at an early stage, using a convertible note is odd. Typically, we see convertible loans being used for much smaller investments early on. It is especially odd given that Hanneman apparently included a number of significant rights for himself, which aren’t usually given in a bridge financing. The primary reason why startups like convertible note financings is the simpler framework, which can be put in place in a matter of days, if needed, and at a fraction of the cost of a full-blown equity round.

An equity financing (the sale of shares), on the other hand, usually comes with all kinds of bells and whistles, which can take weeks or even months to properly negotiate with the investor and his counsel. Basically, doing a complex convertible note deal defeats the purpose of such investment structure for the company. So, let’s just say, whatever Hanneman’s term sheet said, it was a far cry from a standard Silicon Valley bridge financing deal, though certainly possible. For the sake of honesty, I will say that I have seen very simple equity deals with almost no bells and whistles and unduly complex convertible debt financings loaded with investor rights, even for much smaller investments than $5M. So, sometimes reality can be even stranger than fiction.

Later in the series, Hanneman’s assets fall below a billion, and he is no long a member of the three comma club. To remedy this, he sells his interest in Pied Piper to Raviga Capital. But what exactly did he sell? It sounded like he was selling shares. But if his investment had been in the form of a convertible note financing (a “loan”), he would not have had shares. Convertible notes will normally convert in a qualified (sufficiently large) equity financing round, which Pied Piper did not have. So, if Hanneman invested on a note, it should still be a note. Ok, maybe in the series they didn’t get into the fine details that I find so interesting. Maybe Raviga Capital acquired the promissory note. But it sure didn’t sound like it. In fact, on CrunchBase – yes, Pied Piper has a CrunchBase profile – Hanneman is listed as a Series A investor (https://www.crunchbase.com/organization/pied-piper/investors). Series A is a series of preferred shares, which are typically sold in an early equity financing (following Series Seed and preceding Series B).

Blocking Rights. Remember when Laurie buys Erlich’s shares for next to nothing, giving him just enough to cover his debt? She then explains to Richard, when he confronts her, in an exasperated manner, that under the terms that she inherited from Hanneman, she had the right to block any sale by Erlich. Full blocking rights on a sale by another stockholder? That is very unusual! Company right of first refusal on transfers by founders – sure! That’s quite standard. But all that would do is give Pied Piper the right to buy out Erlich if he had a third-party buyer for his shares, having to match the price offered to him by his buyer (in this case, $5M for half of his shares). Investor’s right of first refusal – could be. But that would give Raviga Capital the right to match Russ Hanneman’s price, and buy the shares that Erlich was offering to Russ Hanneman. No standard rights offered to investors would grant Raviga Capital the kind of blocking rights that it seems to enjoy in the series. In the U.S. and especially in Silicon Valley deals, we just don’t see an outright block by an investor on the sale of shares by another. So that was a bit sensationalist. Of course, just because the series is called “Silicon Valley” doesn’t actually mean it has to depict its protagonists being offered middle-of-the-road standard investment terms, and this is another instance where they weren’t.

Drag-Along. How was Raviga able to force the sale of Pied Piper? Control of the Board alone is not enough here. Such a sale would require an affirmative stockholder vote by, at a minimum, a majority of the outstanding shares, and Raviga is not a majority stockholder. I can only assume that among the terms that Pied Piper accepted from Russ Hanneman was a drag-along. A drag-along is a voting agreement among stockholders, which allows one group of stockholders to force the others to vote to approve an acquisition of their choosing. The group of stockholders that can force the sale depends on the deal. In certain scenarios, it can be a single influential investor. A drag-along would provide the necessary mechanism to support the forced sale of Pied Piper to Bachmanity.

Lawyer. How is it that Pied Piper does not have its own corporate lawyer after two rounds of financing? We are initially led to believe that Ronald LaFlamme, the extravagant guitar-playing chap, is Pied Piper’s lawyer. But he is actually counsel to Raviga! It’s on Raviga’s website – yes, Raviga has a website (http://www.raviga.com/index.html). When Pied Piper is about to enter into a white-label licensing agreement for its box, it’s Monica, who catches the grant of exclusive intellectual property rights to the customer. If it wasn’t clear enough in the show, that really is a huge red flag in a commercial agreement. So here we are, about to sign a multi-million dollar commercial agreement and an attorney representing Pied Piper hasn’t so much as laid eyes on it? Sure, Pied Piper is next-to-broke for much of the show, but this episode was actually at the height of its glory. Then again, maybe if Pied Piper had corporate representation from the outset, the founders wouldn’t have found themselves at the total mercy of their investors! And that is not a bad self-serving message for me to conclude on.

Happy company-making and enjoy Season 4, coming in 2017!

Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

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Tuesday, September 15, 2015

Convertible Promissory Notes: 3 Mistakes to Avoid

To raise a Series A round these days a startup has to have a product, users, and traction. It may take a lot less money to get there than it did in 1999, but most startups still can’t bootstrap their way there. So before a company ever raises a Series A round, or even before it raises a Series Seed round, it will usually raise a convertible promissory note round, also known as a bridge financing.

While a convertible note financing is one of the simplest types of investment transactions, there are still a few nuances that, when done wrong, can really hurt a company down the road. For a very detailed write-up about convertible promissory note terms and structure, you can read my Annotated Convertible Promissory Note post. This post, on the other hand, is dedicated to some more nuanced mistakes to avoid.

All of the mistakes that we are going to discuss in this post are ones that won’t manifest themselves until there is a qualified equity financing, the note matures, or there are circumstances that require that the terms of the note be amended.

Conversion into a Shadow Series of Preferred. Let’s start with what is usually seen as the culmination of a startup’s early success – it has a term sheet for an equity financing round at a valuation that is significantly higher that then conversion cap on the notes. In this situation, the investors will typically insist that, despite what the note conversion provisions state, the notes convert into a shadow series of preferred stock, rather than the same series of preferred as the new investor.

The reason is that the certificate or the articles of incorporation, state in dollars the liquidation preference of each series of stock. If the purchase price per share of the new investors is $1.00 per share in the Series A round, and they are getting a 1x liquidation preference, then the liquidation preference of the Series A will be $1.00 per share. However, if the conversion price of the notes is only $0.10 per share, which may be the case if their conversion cap was 1/10 of the valuation of the new round, then with a $1.00 per share liquidation preference on each of their shares, the early investors would be getting a 10x return. This is not something that new investors will typically agree to. If there is no provision in the notes for conversion into a shadow series of preferred, and if the note investors don’t want to amend their notes, the equity financing can fall apart! Even if it doesn’t fall apart, the timing can slow down significantly, as management tries to work this out with their early investors.

For this reason, we recommend the automatic conversion provision in the notes to provide for conversion into a shadow series of Preferred Stock, if so requested by the new investor.

Conversion on Maturity. Convertible notes, despite the way that they are frequently being used by startups, are debt instruments, and as such, they have a maturity date. A “Maturity Date” is the date by which the debt must be returned, if not converted into equity. Startups, however, are not usually in the business of repaying convertible promissory notes, nor is repayment the result for which their investors are hoping when they make the investment.

As we know, building a company comes with many variables, and despite everyone’s best intentions and efforts, it is neither unlikely nor uncommon for a company to fail to raise a qualifying equity financing round prior to the maturity date. If that happens, there are several ways it could play out. The investors could agree to extend the maturity date and give the company time to raise an equity round. Or, if they are disappointed with how management has been running the company, they could demand repayment. If there has not been a qualifying equity financing round, it is unlikely that the company would be able to repay this loan, even if it has revenues. Of course, if its revenues are sufficient to repay the loan, it’s unlikely that the investors would want to be repaid!

For this reason, we recommend building into each note from the outset a formula for how the note will convert on maturity if it has not converted prior to such time in a qualified equity financing. The parties should decide on the class and series of shares into which the note will convert on maturity, which can either be common stock, a new series of preferred stock, or an existing series of preferred stock, if the company already has issued preferred stock. If the note is going to convert into a new series of preferred stock, then the parties have to agree on at least the basic rights, preferences and privileges of this series. The notes should also specify the valuation that will be used in the conversion or another algorithm that will be used to determine the number of shares that will be issued to the investors in the conversion in cancellation of the loan.

Amendment Provisions. The “Amendment” section of an agreement is the section that specifies how that agreement may be changed in the future. If there are only two parties to an agreement, this is simple – the agreement can be changed with the consent of both parties. On the other hand, if we have an agreement with many parties, like a shareholders’ agreement among fifteen shareholders, in order to make it possible to ever amend that agreement, we might set some minimum threshold, e.g., the shareholders representing a majority of the voting interests must approve the change for it to apply to the agreement and bind all the other shareholders. This prevents one party from holding everyone else hostage when changes need to be made.

Now that we understand the principle of it, let’s talk about how it applies to convertible notes. On the one hand, each note is an instrument issued by one party – the company, to the other – its investor. If there are 15 investors, then there are 15 different notes. On the other hand, we can think of these notes as part of one bridge financing transaction. They will usually have substantially the same terms, and will frequently be issued pursuant to a single note purchase agreement to which all of the investors will be parties. Finally, in the ideal world, all of these notes will convert in the company’s next equity financing into most likely the same series of stock with the same rights, preferences and privileges. From this perspective, it is in the company’s interests to make the process of amending the notes, which frequently must be done in connection with a qualified financing round, as painless as possible. If, in order to amend 15 notes, the company must get the consent of each of the 15 investors, this slows down the equity transaction and gives each of the investors a lot of leverage. For this reason, our strong recommendation is to draft the amendment provisions of the promissory notes issued by a company as part of the same bridge financing transaction, even if that transaction spans over the course of six months or a year, to allow for amendment by a majority-in-interest of the note holders.

Happy company making!

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Friday, January 23, 2015

What Do Startup Investors Want?

It is a well-known fact that startup investors, whether they are angels or venture capitalists, ultimately make their investment decisions emotionally, or, to say it another way, based on a gut feeling.

However, if you are an entrepreneur looking for funding for your startup, this knowledge alone does not help because it does not answer the question “what does an entrepreneur need to convey to the investor, for the investor to have the right emotional reaction which leads him to write the check”.

What then do early-stage investors in the tech sector look for when they are evaluating a project? What are the factors that make them excited about one project but not another?

People. The investor needs to believe in, in fact, be inspired by, the entrepreneur and his initial team. He needs to be convinced that this particular team has at least the following characteristics:

the necessary technical skills to complete the project in the proposed timeframe,
the required steadfastness, dependability, and firmness of character to see the project through, and
the personalities among the founding team that will complement, rather than detract from, one another, especially when times get tough (as they often do in startups).

Some ways to demonstrate to an investor that the team has what it takes, to name just a few, are (i) a history of working together as a team on a prior successful project, or (ii) external validation of the project for which funding is being sought through market traction.

Opportunity.

Economic. To elicit the right emotional response from an investor, an entrepreneur needs to persuade the investor that, when properly executed by the right team, there is tremendous economic opportunity in the project. That may mean that the project is in a fast-growing market and that its premise is promising in light of what are perceived to be future trends. It also means that the investor can (and does) imagine a scenario where, with the right execution, the project will generate a significant economic upside, a return on investment of 10 to 30X.

Impact. Some investors will be looking specifically for projects which promise to generate a measurable, beneficial social or environmental impact alongside a compelling financial return. This is called impact investing and it is becoming more widespread. When pitching, it is critical for the entrepreneur to know whether the investor subscribes to this investment mandate. If so, he will be a lot more excited about a project that seeks to build literacy than the next “Cut the Rope” app.

Competitive Advantage. Finally, there needs to be a convincible competitive advantage, one that will allow this particular project to succeed over others in the same space. Its people, with deep specific expertise in an obscure area highly relevant to the project, for example, may be such competitive advantage. It may also be the technology behind the project, preferably protected by strong patents. Having a significant head start in an industry with a high barrier to entry might be another.

One way or another, an investor needs to feel that the horse he is asked to put his money on, the particular project that he is asked to invest in, in keeping with the metaphor, will come in first. The factors listed above, when applied to a startup especially, are highly subjective. It is the entrepreneur who is able to convince investors that his project excels in all three categories that attracts capital easily and gracefully!

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Monday, September 30, 2013

What Can Startups Disclose, Before Filing a Patent Application

The current wisdom on attracting investment for a startup states that the way to get the attention of frazzled investors is to present them with a short video that draws them in. From the perspective of getting emotional buy-in from investors and willingness to spend 5-10 minutes reading a startup’s executive summary or browsing its investor deck, a promo video is the way to go.

But if a startup has not yet filed at least a provisional patent application, what can be the ramifications of such a video? I have asked Mark Beloborodov, an experienced U.S. patent attorney, to explain the risks of early disclosure.

America Invests Act. According to the expanded definition of “prior art” pursuant to the Leahy–Smith America Invents Act (AIA) that went into effect on March 16, 2013, public use, sales, publications, and other disclosures available to the public anywhere in the world as of the filing date bar patentability. Public disclosure of the invention by the inventor (or someone else who “obtained” the disclosed subject matter from the inventor) within one year prior to filing (inventor's "publication-conditioned grace period") constitutes an exception. This exception is a concession to opponents of the AIA’s “first-to-file” regime that already exists in the European Union and the rest of the world, and a carryover from pre-AIA patent law, which has traditionally given startups comfort to discuss their invention publicly before filing a U.S. patent application, in connection, for instance, with fundraising efforts.

Product for Sale. One potential problem that a promo video featuring the product may pose is that it may not fall within the “publication by inventor” exception, but may instead be considered an offer of sale of the product featured. Any novel and non-obvious features, functionalities and attributes implemented in the product that, prior to the video’s release, constituted patentable inventions, may suddenly fall into the public domain and thereby substantially reduce the value of the business. Publication. But suppose that the promo video (or an article) does not reach the level of the offer for sale and qualifies for the publication-conditioned grace period. Does that mean that it is safe in those circumstances to disclose inventions, for which a patent application has not been filed?

It’s not so simple, says Mark. While the disclosed inventions themselves may still be protected, what if a public discussion is spurred by the disclosure that builds on the information made public by the inventors? Anything that is generated in that public discussion above and beyond what the inventors disclosed falls into the public domain. If the initial publication disclosed only part of the invention, and then other elements of the invention surfaced in subsequent public disclosures, even such other elements previously known to the inventors, patent protection for those elements may not be sought later. So any disclosure prior to at least a provisional patent application is fraught with risk even in the US, not to mention loss of patent protection for the invention as a whole in other countries.

The Band-Aid Solution. So what’s one to do? In the perfect world, a startup’s patent application would be prepared by a patent attorney in advance of starting to pitch investors and certainly well in advance of publicly distributing promotional materials. Such application, even if a provisional one, would be drafted after careful consideration of the invention and would contain a detailed and enabling disclosure of how it is made and operates, which fully supports patent claims to be included later in the full-blown application.

But we don’t live in the perfect world. To preserve intellectual property rights in the product or solution that will be the subject of an upcoming promotional video, Mark recommends making at least a minimalist provisional patent application filing before the video becomes public. Even if the filing consists of little more than the video script, overview of key components of the invention, and annotated screen shots illustrating them, risky as it is, it’s better than nothing. After the founder strings together the materials that will go into the promo video, it is advisable to have a patent attorney do a quick review. This might translate in total into a $1,000-$1,500 cost, including the filing fee, but, if it may preserve intellectual property rights that might otherwise be lost forever, seems like a good compromise.

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Monday, September 9, 2013

Preparing for a Silicon Valley Fundraising Trip

[This post is an excerpt from my presentation entitled Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder.]

If you are traveling to the Silicon Valley to raise capital for your startup from abroad, you can save yourself a lot of time and make the trip more efficient by preparing thoroughly and doing your homework before the trip. Here are some things that should not be overlooked:

Research. Before your trip, sign up for startup networks, groups and mailing lists, to receive announcements about upcoming events. (This is covered in more detail in the full version of my presentation.) You should know which venture capital firms and super-angels are investing in your space. You should research and consider which strategic investors you should target, if any. Based on your research, prepare a list of 10 to 20 people that you’d like to meet while you are here. This list is aspirational, so if you do not get the opportunity to meet all of them, you have not failed.

LinkedIn. Create a LinkedIn profile, if you don’t already have one. If you have one, check to see if it's time to review and update it. This is your business resume. Most professionals rely on it!

Don’t be lazy – take the time to write-up prior projects and experience, your education, and anything else relevant to what you are doing and to who you are now. This is your chance to tell people what you want them to know about you!

Note that LinkedIn is also a great place to do your own “diligence” about the people you’ll meet while networking, through introductions, or otherwise.

Video Presentation. If you have the resources, create a short video teaser and post it on YouTube or Vimeo for easy sharing with new contacts. A few excellent examples are below. Notice how effective it is if the teaser can demo your product or service. A picture is worth a thousand words. And a video is worth at least a thousand pictures, charts and graphs.

Videos work well to get you a foot in the door (not seal the deal for you). Before an investor takes the time to read your executive summary, in fact, before he even makes the decision about whether it's worth his time to do so, it is helpful if you can get him excited (or at least curious) about your product or service. The way to do it is by offering information in an easy and fun format - video - that appeals to the viewer's emotions, not just his intellect.

Executive Summary / Presentation. VCs don't read business plans. They just don't have enough hours in the day to screen companies based on their business plans, and, frankly, with business at an early stage, a business plan reads more like astrological predictions than fact.

Still, if you are talking to an investor at a networking event, or have been introduced to an investor by email, he will want to see something in writing about your company. You will be expected to send an executive summary (a one-pager that introduces the investor to your company and piques his interest) or, more frequently these days, an investor slide deck (8-10 PowerPoint slides that serve the same purpose but are easier on the eyes).

Instead of trying to work with your team back home when you are already here, faced with a time difference and time pressure, prepare this before you come. You may have to adjust it based on the feedback you receive from investors, but if you have a solid draft, it will make your life easier.

A really well-made executive summary or deck can set apart your startup from the rest and give you a fighting chance at a more involved look from the investor.

You can work with designers and advisors to help solidify your message in your materials. But do not hire someone to write them for you. You have to own your materials, and by that I don't mean the legal sense of ownership, but in the sense that you stand behind each word in that document and, if prompted, can expand in verbal or written format on any of the points made in it!

U.S. Phone Number. With your Google account, you can get a free Google Voice number and set up call-forwarding from that number to your temporary U.S. number.

Google Voice also offers voicemail functionality. Make it easy on your callers - record a greeting with your name and the name of your company, so that they know they reached the right number.

Business Cards. Your business card should be in English and should contain (1) your company name (and if you have not registered the company, the name that you think you will use), (2) your name and title, (3) your corporate domain email address, (4) the address of your physical office (if any), and (5) your U.S. phone number.

Note that you don’t have to spell your name on the card the way it is spelled in your passport. Feel free to spell it in a way that will make it easy for English speakers to read. This will save you time and annoyance, unless, of course, you like correcting people and having off-topic conversations about foreign names, the English language, pronunciation, etc.

Credit Cards. The most common and convenient payment method for most things that you’ll need to buy on your trip will be a credit card. Every online purchase will require it and some merchants (like car rental places) will take your credit card number as a security deposit, even if you pay cash.

When getting ready for your trip, make sure there is money in the account tied to the card that you are taking with you. To really play it safe, take several credit cards tied to accounts at different banks. It is best to call ahead, and let your bank know that you will be in the United States. Sometimes banks will suspect identity theft and block your card, if there is unexpected activity on your card in a foreign jurisdiction. Nothing quite makes travel so uncomfortable, as having your credit cards lock up, when you are relying on them as a primary payment method!

Driver's License. While you are visiting California, you are permitted to drive with your valid foreign license. Make sure to take it with you, as you are packing for your trip, and that it does not expire during your trip (rendering it no longer valid).

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Wednesday, September 4, 2013

10 Basic Principles of Effective Networking

[This post is an excerpt from my presentation entitled Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder.]

Networking events are a lot of work. But if you are building up your network, networking at startup events can be a great way to get exposure to a lot of people fast.

Because networking is hard work, if you are going to do it, you might as well make the most of it. My suggestions are based solely on my own personal experience and reflect either what has worked for me or my observations of the behavior of others. There may be other effective networking tactics, so if you are feeling anxious about this, read a few more articles (or books) for a deeper dive.

1. Set the Right Goals. Make sure you set the right goals and expectations for yourself when you go out to network. Chances are that you will not meet and win over an investor at a networking event (unless the event is a pitch competition than you win, and frequently not even then).

What you should really be hoping to do is to ingratiate yourself with three to five well-connected individuals, who will make introductions for you to people in their network. Note that the people that you get introduced to may not be your investors either.

The goal of networking is to grow your network because you never know where your investors, customers, or even future employees may come from. Approach networking with an open mind, and good things will come!

2. Dress to Impress. When you go to events, you want to be memorable, stand out in the crowd. That way, when someone you spoke to for a few minutes wants to introduce you to someone else at the event, he can find you again in the crowd. As with anything, you have to be careful not to overdo this, because if you are too outlandish in your wardrobe, you might be memorable, but it won’t score you any points. The trick is to stand out in a positive way.

At the very least, if you have a T-shirt with your company’s logo, wear that. It may not be very original, but it will be a good conversation starter, and people with a visual memory are more likely to remember the name of your company if it’s written across your chest.

3. Don’t Forget Your Business Cards. Business cards are cheap, so stock up and bring enough. Sure, if you run out, you can add the person you are speaking with on LinkedIn during the conversation or take his card and write your name on the back of it. But coming unprepared does not characterize you well, and if there is at least a small chance someone will keep your pretty business card around and will remember about you some time in the future when it could be advantageous to you, you can be sure they'll toss your info scribbled on the back of their card. LinkedIn is pretty good, but unless you have a stellar memory for names, it can be hard to find the contact that you need among your 500+ contact list. So, personally, I prefer cards.

But don't mistake the exercise of handing out cards for networking. If you hand out your cards like they are on fire, but don't cement it with at least 3-5 minutes of solid conversation with the folks you gave the card to, you may as well have thrown them in the trash.

4. Forget Your Comfort Zone. Networking is not comfortable. It would be easy if relevant contacts would line up to meet with us in an orderly fashion when we show up at an event. In fact, that’s not what happens at all. You are lucky if you are approached by another networker looking to strike up conversation. More frequently, you find yourself in a room surrounded by small groups deeply immersed in their own private conversations. Those small groups look intimidating.

But if you stay within your comfort zone and hover in the corner, waiting to be approached, which might be your natural inclination, you will be wasting precious time. So try to make eye-contact with someone in a group, to see if they’ll welcome you to join them, or just shamelessly insert yourself into a group and when there is a pause in conversation, extend your hand and introduce yourself. At a networking event, no one will think worse of you for doing so. Sometimes, the topic of discussion will be so narrow that after a few uncomfortable minutes you will decide to leave to look for another place to park, but the more polite networkers will attempt to integrate the newcomer into their conversation.

5. Stay Positive. If you want to leave a positive impression, you have to radiate positive energy. If you complain about your suppliers and customers, or put down your partners, employees or investors, it leaves a bad taste with the person you are speaking to. So focus on the positives. Be that person that everyone will enjoy talking to!

6. Keep Conversation Light. If you want to make more than a single connection at an event, you will need to move fairly quickly from one conversation to the next. Keep in mind that no matter how passionately you feel about public policy or politics, a tech networking event is not the place to get entangled in a heated debate, whether about the conflict in the Middle East, the shortcomings of the Obama administration, a woman's right to abortion, the right to bear arms, or U.S. world domination. In general stay away from religion and politics, unless it is to say that you are hoping that the Startup Visa initiative passes, which is a pretty safe bet. Finally, remember to smile! There is nothing as disarming as a genuine smile, so it is going to be your best networking weapon!

7. Listen First. When you engage in a one-on-one conversation with someone at a networking event, even if you are burning to proselytize anyone who will listen to the cause of your amazing company, recognize that everyone there has a story.

If you practice active listening – paying close attention to what the other person is saying, reading their body language, asking follow up questions, sharing information that they may consider valuable, and looking for ways you could help – you will find people more interested in your story, and willing to help, whether with advice, introductions, or empathy.

8. Don’t Be a Salesman. Think about how you feel when you are approached by a salesman. What’s your first reaction? I know mine is, “No, thank you!” The last thing you want to do at a networking event is to be perceived as a salesman. Instead, you want to be seen initially as someone who is easy and interesting to talk to and eventually, as a good long-term contact.

9. Follow Up. You have to follow up, if you don’t want all that networking to have been in vain.

If you promised to send your executive summary, do so within a few hours of the meeting, if you can, and within 24 hours at most. If the person you talked to promised to send you something, follow up with them after the meeting and remind them. They have busy lives, so take the initiative!

When you are networking, you are building up your social capital, so don’t just be dependable when it can stand to benefit you. If you promised a networking contact to send the name of an app that slipped your mind during the conversation or to make an intro to a good web designer, do it.

The greatest value of networking is in the long-term connections that you form. For this reason, strong follow up is essential. Invite contacts that you make at a networking event that you would like to make a more permanent part of your network to meet with you for coffee sometime that week. Almost no one will turn down a coffee offer, unless (a) it’s a VC, or (b) you are perceived as a salesman.

10. Have Patience! Have patience with the process and try to enjoy it! Networking does not produce immediate rewards, but it does pay off in the long-run!

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Tuesday, July 23, 2013

Effect on Startups of SEC Changes Eliminating the Prohibition on General Solicitation in Certain Offerings

[A Russian-language version of this article may be found on Firrma.ru]

In April 2012, Congress passed the much-awaited Jumpstart Our Business Startups Act (JOBS Act), which directed the SEC to draft regulations removing the prohibition on general solicitation and general advertising for securities offerings relying on Rule 506, provided that sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors.

On July 10, 2013, more than a year later, the SEC has finally issued the final rules that will implement the JOBS Act legislation.

Securities Laws Overview. Under the current U.S. federal securities laws, companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Rule 506 of Regulation D is the most widely-used exemption from registration. In an offering that qualifies for the Rule 506 exemption, an issuer may raise an unlimited amount of capital from an unlimited number of "accredited investors" and up to 35 non-accredited investors.

"Accredited investors," as defined in Rule 501 of Regulation D, are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations, or charitable organizations that meet certain minimum asset levels. A person qualifies as an "accredited investor" if he or she has either (a) an individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence; or (b) an individual annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Changes to Rule 506 Generally. The final rules approved by the SEC make changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that (a) the issuer takes reasonable steps to verify that the investors are "accredited investors"; and (b) all purchasers of the securities qualify as "accredited investors" or the issuer reasonably believes that the investors so qualify at the time of the sale of the securities. In other words, there is no restriction on who an issuer can solicit, but an issuer faces restrictions on who is permitted to purchase its securities, if general solicitation or general advertising is used as a means of capital raising. Nevertheless, issuers conducting Rule 506 offerings without the use of general solicitation or general advertising may continue to conduct securities offerings in the same manner as they did previously and aren't subject to the new verification rule.

Changes to Form D Filing. Prior to new regulations going into effect, an issuer selling securities using Rule 506 was required to file a Form D no later than 15 calendar days after the first sale of securities in an offering. Under the new rules, issuers that intend to engage in general solicitation as part of a Rule 506 offering would be required to file the Form D (a) at least 15 calendar days before engaging in general solicitation for the offering and (b) within 30 days after completing an offering to update the information contained in the Form D and indicate that the offering has ended.

The scope of Form D is also being expanded to include such additional information as:

identification of the issuer's website;

expanded information on the issuer;

the offered securities;

the types of investors in the offering;

the use of proceeds from the offering;

information on the types of general solicitation used; and

the methods used to verify the accredited investor status of investors.

Solicitation Materials. Under the new rules, as part of SEC's monitoring process, issuers will be required to submit written general solicitation materials used in the offering on the SEC website. Materials submitted in this manner would not be available to the general public.

Verification of Accredited Investor Status. The final rules provide a non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors. For instance, an issuer may review copies of any IRS form that reports the income of the purchaser and obtain a written representation that the purchaser will likely continue to earn the necessary income in the current year. Alternatively, an issuer may receive a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser's accredited status.

Disqualification for Bad Acts. A restriction in the new rules states that an issuer cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule had a "disqualifying event." Persons covered by the rule include directors and certain officers, 20% beneficial owners, promoters, and persons compensated for soliciting investors. A "disqualifying event" may be a criminal conviction in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries within 10 years of the proposed sale of securities, or other types of misconduct relating to the securities and trading markets. However, an exception from disqualification exists when the issuer can show it did not know and, in the exercise of reasonable care, could not have known, that a covered person with a disqualifying event participated in the offering.

Disqualification for Failure to Make Timely Filings. An issuer is disqualified from using the Rule 506 exemption in any new offering if the issuer or its affiliates did not comply with the Form D filing requirements in a Rule 506 offering. The disqualification would continue for one year beginning after the required Form D filings are made.

Impact of Changes on Startups. The JOBS Act sought to make it easier for a company to find investors and thereby raise capital. Have the regulations that have been adopted by the SEC faithfully followed legislative intent, improving the capital raising experience for companies? Only time will provide us with a definitive answer, but in the meantime, here are some factors that will weigh on the success of the legislation as a game-changer in the industry:

Demand by Investors: whether there in fact exists a large pool of "accredited investors" who would invest (more frequently and in greater amounts than they are currently) given better access to a pipeline of private offerings;

Longevity: whether, even if there is an initial spike in investments by new accredited investors, the novelty and excitement will not wear off, especially as initial investor optimism faces the harsh realities of investing in early-stage emerging technology companies;

Non-Accredited Investors: whether the "either/or" nature of the new rules, preventing companies from engaging in general solicitation along-side other fundraising activities, potentially to non-accredited investors, will cause companies not to take full advantage of the new rules;

Compliance Hardships: whether the requirements for additional filings (e.g., expanded Form D, solicitation materials), state securities laws, as well as the burden placed on the companies to reasonably ascertain the status of their investors as "accredited investors," coupled with disqualification from use of the exemption for failure to timely file, will hamper widespread use of general solicitation as a means of raising capital;

Publicity: whether the public disclosures which would be made in the solicitation materials and the associated loss of stealth-mode advantage will have a chilling effect on early-stage companies;

Involvement by Sophisticated Investors: whether sophisticated investors, such as VCs and super-angels, will engage in, or be deterred from, participating as investors in offerings through open solicitation;

Later Stage Follow On Rounds: whether successful later-stage startups will consider this an appealing alternative to additional rounds of venture capital or institutional investment;

New Investments Instruments and Goals: whether access to different types of investors than typical market players will allow previously "unfundable" companies to raise capital - e.g. LLCs, companies with solid revenues, but no exit opportunity, etc.;

Higher Valuations: whether increased competition for companies that stand-out in the open fundraising process will drive valuations, such that this will be the preferred means of raising capital even for companies that have access to venture capital money; and

Crowdfunding: whether the successes of crowd-funding platforms like Kickstarter and Indiegogo will be repeated on a larger scale with equity investment in the mix.

The rule amendments become effective on September 23, 2013 (60 days after publication in the Federal Register).

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Monday, May 20, 2013

Coming to the Silicon Valley to Raise Money

Recently one of our clients, Ruslan Pichugin, CEO of Yocto Games based in Moscow, Russia, came to the Silicon Valley for a short exploratory trip. We thought Mr. Pichugin’s experience may be interesting to other startuppers out there, who are contemplating a trip to the Silicon Valley to raise money, network, or both, and Mr. Pichugin kindly agreed to answer a few questions for us.

(1) What were some of your goals in coming to the US? Do you consider the trip a success in light of those goals?

I had multiple goals for this trip. The most important goal was to incorporate my company, Yocto Games, in Delaware. In parallel, I wanted to learn as much as I could about the legal and financial aspects of forming and funding a corporation in the US. I am happy to say that I accomplished this goal.

My second goal in order of importance was to find investors interested in my company. I realized that in two to three weeks (17 days in total) it would be next to impossible to find funding, but I wanted to at least start that process. I met several people potentially interested in investing in my company, but our discussions are still at an early stage and it may take some time for us to reach final agreement on terms. So I consider this goal 50% achieved, but taking into account the fact that I did not know anyone in Silicon Valley when I arrived and was only here for a few weeks, I feel that this is not a bad result.

There was a third goal, and that was to see American life. I was able to meet with people from many different walks to life – businessmen, computer programmers, lawyers, chefs, doctors, and athletes. I was happy to discover that life in America is not too different from what I had seen on TV!

Overall, I gained a good deal of experience, made some great connections, and consider my trip a success.

(2) Where did you stay during your trip (hotel, city)? Are you happy with your choice of the hotel and your geographical location?

I stayed at the Pacific Euro Hotel on Main Street in Redwood City. The cost for a room without a shower (yes, those kinds of rooms exist!) is $65 per night, but I stayed in a room with amenities, which cost me $80 per night.

This hotel works well for a business trip, as a place to crash at night. But it’s certainly no Ritz Carlton.

My hotel was centrally located, only a five-minute leisurely walk to the Redwood City CalTrain station. And since both San Francisco and San Jose are only a 40-minute train ride away from the Redwood City station, I thought geographically I was in a great spot.

(3) Tell us about your cell phone situation during your trip.

Initially I used my Moscow Beeline (Билайн) phone. It worked well here, but because of roaming I ended up spending something like $250 in just a few days. After that, I stopped using it and bought a local phone. I settled on a $35 “dumb” phone from AT&T. As a result, calls home became one-third of the price I was paying previously, and local calls barely cost anything at all. Over my stay, I spent about $60 on this service.

(4) I know you used public transportation and taxi to get around and did not rent a car. In retrospect, would you do anything differently?

I think that for a first visit to the U.S., it is beneficial to walk and to try to use public transportation. It’s harder, but since I wanted to get a feeling for how people live here, it turned out not to be so hard after all. In Moscow, I am behind the wheel almost the entire day when I have to go somewhere, and it takes a remarkable amount of time and energy. Next time, I will definitely rent a car, but without knowing the local roads, I would have been anxious to rent a car on my first trip here.

Although I must say, local driving brings a smile to my face. I am certain that anyone who is used to driving in Moscow would feel in the Silicon Valley not unlike a world champion in swimming would feel competing at a YMCA against their juniors’ team.

(5) What were some of the most useful events that you attended in the Silicon Valley? What would you recommend to entrepreneurs coming to Silicon Valley with an exploratory mission like your own – where and how should they look for useful activities?

The best events are ones where you can meet interesting people and useful contacts. Where to find them? I think you can find them at any startup event. The most important thing is to attend as many events as possible and to be open to meeting people. Of course, the group organizing the event and the event “topic” is important too, but you can meet very interesting people at a not-so-interesting event.

For example, I attended an event where technology companies were recruiting software engineers, a kind of specialized job fair. So in truth, I had no business being there. But I spent a half an hour talking to an entrepreneur from Berlin, who told me about the startup scene in Europe (which turned out to be very useful information subsequently in meetings with other people). Then I met a doctor, maybe in her 60s, who is working hard on her healthcare startup. I learned a lot about the healthcare industry from her, and made an interesting new contact. Finally, I met some people from a large gaming company, one of whom may be interested in investing in my project.

So you can never know ahead of time what the best meetups or events will be. The best approach is to be open to the opportunities all around you, and to meet as many people as possible.

(6) In hindsight, is there anything you did that you realize was a waste of time that could have been avoided?

My approach is that any experience can be useful (so long as it’s not harmful to your health). And often it will take some time to know what the value of a particular experience really was, so I never rush to dismiss an experience as a waste of time. Time will tell!

(7) What general advice would you give someone coming to Silicon Valley in your footsteps?

The most important piece of advice I have to offer is to have a contact person who can offer advice and assistance. I met with Inna Efimchik, and she was able to help me find many different startup conferences and events to attend, as well as incorporate my company in Delaware. Other than that:

Check out www.meetup.com. This is a great website that allows you to find, and register for, events both in advance of and during your trip.
Be prepared to step outside your comfort zone and actively approach people that you want to talk to at events. Talk to everyone (almost everyone) that you meet.
Get a local phone! Not only will it save you money, it will make it easier to exchange information with new contacts.
Everyone in the Silicon Valley uses LinkedIn, so before your trip, make sure that you have a LinkedIn profile (and it’s up-to-date).
Don’t forget to bring with you business cards printed in English.
Be prepared that prices in the Silicon Valley are roughly equivalent to prices in Moscow, on everything (food, taxi, mobile service).
The best burgers are at Five Guys! They are better than Carl’s Jr., In-n-Out, McDonalds and Wendy’s!

Lastly, be prepared for new experiences and enjoy!

Thank you, Ruslan! If you'd like to hear more from Ruslan, he also gave an interview to Silicon Valley Voice (in Russian) which can be viewed here: segment 1 and segment 2.

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Sunday, April 28, 2013

FLIP IT! A Guide to Flipping Your Company to the U.S.

What is a Flip? A flip (the “Flip”) is a legal mechanism by which all of the equity interests of one company (the “Foreign Co”) are transferred to another company (the “US Corp”) and all of the former equity interest holders in the Foreign Co receive proportionate equity interests in the US Corp instead. As a result of a Flip, the Foreign Co becomes a wholly-owned subsidiary of the US Corp. The Foreign Co continues to exist and often continues its operations. The only difference is that it now has a single owner, the US Corp.

How Does It Work? Let’s see how a Flip works using a fictional company, Mobilka Rus Ltd.

Background. Mobilka Rus is a limited liability company formed under the laws of the Russian Federation. It has created and owns intellectual property and released a mobile app. It has raised seed capital from an investor in Russia, and has hired a few employees in Russia as well. Mobilka Rus is owned by its two founders, Dima and Sergey, who each hold 40% of Mobilka Rus, and by their investor, Dengami Investments, which owns 20%.

Step 1. The first step to performing a Flip is to incorporate a brand new corporation in the U.S. Our friends at Mobilka Rus incorporate Mobilka US Corporation in Delaware. Mobilka US gets a set of bylaws, a board of directors that Dima, Sergey and Dengami Investments all agree on (composed of 3 members, one for each of Mobilka’s owners) and is ready to go.

Step 2. Next, Dima, Sergey and Dengami Investments enter into a Share Exchange Agreement with Mobilka US, pursuant to which they transfer their entire ownership interest in Mobilka Rus to Mobilka US, such that Mobilka US becomes the 100% owner of Mobilka Rus. In exchange, Mobilka US issues shares of its stock to Dima, Sergey, and Dengami Investments based on their ownership interest in Mobilka Rus. Therefore, Dima and Sergey get 4,000,000 shares of Common Stock of Mobilka US each, and Dengami Investments gets 2,000,000 shares of Series Seed Preferred Stock. The ownership percentages are preserved, only now, instead of sharing ownership of Mobilka Rus, Dima, Sergey and Dengami Investments are holders of 100% of the issued shares of Mobilka US, which, in turn, is the holder of 100% of the ownership interest in Mobilka Rus.

Step 3. Then the ownership of Mobilka Rus must be changed on the official share register of Mobilka Rus, which requires several administrative steps.

Step 4. Having completed the Flip, Mobilka US approaches VCs in the US to raise money. The investment will be into the “business” of Mobilka Rus, since Mobilka US doesn’t have any operational business, but they will make the investment by purchasing Preferred Stock in Mobilka US, which is a Delaware corporation with a familiar structure and feel.

Why Do Companies Flip? Companies interested in orchestrating a Flip generally share the following characteristics:

they are organized in a foreign jurisdiction;
they are operational and may already have raised capital, created intellectual property, hired employees, and/or begun selling products; and
they are interested in creating a U.S. presence that will allow them to (a) raise capital in the U.S. and/or (b) to move some of the operations to the U.S.

Following a Flip, the Foreign Co will continue its operations in the foreign jurisdiction without interruption, while the US Corp will either become a fully-operational U.S. headquarters or merely a holding company, depending on the Foreign Co, its business, and plans.

In our example above, Mobilka Rus can continue to operate in Russia, hire more Russian employees, and continue to develop intellectual property by building out its existing app or creating new ones. The only difference is that Mobilka Rus is now owned by Mobilka US. This enables U.S. investors, who are conservative and usually reluctant to invest in a Russian (or almost any other foreign) company directly, to invest in Mobilka US, which is a U.S. corporation, and to have the comfort that they are investing in the business of Mobilka Rus.

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Sunday, January 20, 2013

Roadmap to Finding Venture Capital Investors

Many of our clients begin working with us when they are raising capital. Often they have raised some initial capital from angel investors in their country and are now looking to raise their next round from institutional investors in the United States.

And while some of the companies we work with are founded by very savvy business people, who could teach all of us a few things about raising capital, others are started by brilliant engineers with ground-breaking technology, but who don’t know how to approach the search for investment capital, in a new country in some cases. If you think you might be in that second category, here’s a roadmap that we’ve seen work well.

Build First. You should build as much as you can, and go as far as you can go with your company, using bootstrap funds or angel investment before you try to raise venture capital.

Likelihood of Success. If you have a product and some initial traction, you will have a far better story to tell the investors than if you just have a great idea or you are several months into developing a prototype. As you may have heard, there are many great ideas, some of them very similar even, and what makes a difference is execution. The better that you are able to demonstrate the ability of your team to execute, the more likely it is that you will get venture funding. Also, if you have skin in the game (bootstrap funds) and have attracted angel funding (friend and family), there is a greater chance that the investors will take you seriously than someone who can’t even convince those close to him to invest and who isn’t willing to risk any of his own money.
Valuation. The earlier that an entrepreneur brings in outside investment, the lower a valuation he can expect to receive, and therefore, the higher a percentage of his company he will have to give up for the same investment amount. Certainly a founder shouldn’t get obsessive about his ownership stake in the company in a way that will impede his ability to attract a strong team or investors. And certainly it is better to have a smaller percent of a larger (more valuable) pie than a greater percentage of a smaller pie. But if the founder has the resources to get more done prior to going out for capital, it is the smart thing to do in term of maximizing both control and ownership.

Get Organized. In preparation for raising capital, you should get your corporate house in order.

Why? Being organized will show the investors that you are serious about your venture and you understand the rules of engagement. It will avoid conflicts about ownership of intellectual property and equity, which can destroy a young company and the prospects of getting funding. Finally, it will streamline the investment process and the investors’ due diligence review when you do find those willing investors, because you won’t have to do last minute corporate clean-up, scrambling to organize at the last minute.
What to Do. If you haven’t already done so, you should (1) incorporate your company, (2) distribute equity interests in accordance with promises you made to your existing team and early investors, and (3) make sure that all intellectual property belongs to the company (and not individually to members of the team). An attorney experienced in working with startups will be able to walk you through everything that you need.

Research & Presentation Materials. To secure VC meetings and to succeed in them you have to be prepared. If a VC knows more about your space than you do, he will never invest. So make sure you do the research.

What should I research? For sure, know the size of your market. Know who the players are, both as far as your competition goes and your potential strategic partners. Know what market share your competitors hold, exits your competitors have had, what funding they have raised, and at what valuations. Know your monetization model (even if you pivot later as many companies do). And finally, know the investors in your space, their strengths, their specializations, their reputation, and the stage at which they like to invest. When you meet with investors, they will invariably ask why you are interested in getting funded by their fund, and you had better have a good, very specific answer!
Materials. Once your research is done, prepare an executive summary, a slide deck to take into meetings, and if you have the resources, a short video that demos your product. The video is to send together with your executive summary to investors. In this day and age of information overload, it will be hard to get an investor to read any materials you send with any amount of attention. Videos have a way of engaging the viewer and elicit an emotional response. Once thus engaged, there is a good chance that your executive summary will get a more thorough review.

Introductions. To get meetings with VCs, try to obtain warm introductions to the investors who invest in your space and in companies at your stage from your network. If your network doesn’t have the right contacts, don’t be shy and grow your network. Go to industry events. Read articles by industry savants and try to engage with them by commenting on their posts or sending them emails. Perhaps you will even be able to bring a few of them on as advisors. Talk to your lawyers, your accountants, your bankers. Utilize tools available to you, like alumni network groups, LinkedIn, or Facebook. Sometimes cold emails to a fund work, but that is the exception rather than the rule. Note that the best-regarded and most effective intros are from entrepreneurs that the VC has already funded. VCs are very busy people with a lot of noise being directed their way. So do what you can to make sure your executive summary gets placed at the top of the pile to the folks that you want to see it.

Relationship. Once you have had an initial meeting with a VC, don’t expect him to send you a term sheet. Remember that investors are in it for the long-haul. Would you expect a woman to decide to marry you after your first date? Before an investor commits millions of dollars to your venture and before he commits to supporting your company over the next 6, 8, or 10 years, he will want to get to know you as a person. You should want this as well! So treat each meeting as adding valuable connections to your network, connections that you should be willing to work to maintain. Don’t just ask for money. Ask for advice. Even if a VC does not invest in your company in your initial financing round, maintaining a relationship can pay dividends down the road when he invests in the second round or makes a valuable introduction because you’ve been keeping him updated on your progress.

A final note, to keep in mind that only a very, very small number of companies, generally believed to be between 0.1% and 0.2% of the companies that look for VC funding, actually secure an investment. So do the best you can, but have a contingency plan in case it does not pan out. Remember, that many highly successful companies were considered “unfundable” by the venture capital community!

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.